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What Is the REAL National U.S. Unemployment Rate – Why the Numbers Can Be Misleading

The unemployment rate is a variable that economists routinely use to measure the health of the economy.

However, some people think the federal unemployment rate doesn’t accurately reflect reality. In fact, the real rate of unemployment may actually be much higher than what’s reported.

The state and federal governments calculate unemployment differently. States often measure unemployment by the number of people receiving unemployment benefits. But that, of course, can be misleading since unemployment benefits expire, leaving the unemployed without a way to be measured.

The federal U.S. government, which releases the ubiquitous “unemployment rate” our country focuses on, uses a calculation to measure how many people are unemployed, though this measurement is also flawed.

How Is the Unemployment Rate Calculated?

Surveyors from the Bureau of Labor Statistics (BLS) visit 60,000 households every month and ask a number of questions to determine someone’s employment status. If someone works full-time, part-time, or is self-employed, they are considered employed. If someone does not have a job of any kind, but has been looking for one for the past four weeks, they are considered unemployed. If someone does not have a job and isn’t looking for one, they are considered outside of the labor force.

The rate is then calculated as the number of people who are actively looking for jobs (i.e. the “unemployed”) divided by the number of people who have jobs plus those actively looking (i.e. the “labor force”). Anyone who is not looking is not considered part of the calculation.

For example, let’s say the BLS conducts a survey of 60,000 households that yields 110,000 respondents. In their survey, they find the following results:

Of those respondents, 60,000 have jobs. They either work for an employer or have their own business.

Another 10,000 say they are looking for work.

The remaining 40,000 are not considered part of the labor force. They may be going back to school, disabled and unable to work, or perhaps have given up looking for work because the economy is so bad. What’s most surprising is that the existence of this last group is completely ignored by the unemployment rate.

According to this result, the unemployment rate would be 14.3%. This is figured by calculating (10,000/(10,000+60,000)) = 14.3%. The 40,000 people who aren’t classified in the labor force are not involved in the calculation, even though this number likely includes those who need work and would gladly take a job if offered one.

U.S. unemployment rate by state

Flaws with Unemployment Calculations

There are multiple reasons why unemployment calculations are not completely accurate:

The number of people left out of the work force is staggering. Millions of people have recently left the work force. The number of unemployed Americans would be more than a third higher if these people were included, which would in turn significantly increase the unemployment rate. Statistics also don’t reflect the number of recent grads who have declared themselves not looking for work.

The household survey uses a limited sample size. Although 60,000 households may seem like a lot, it is hardly representative of the 115 million or so that exist in the United States. It is difficult to know how well these 60,000 households represent the country as a whole. Many factors go into the determination of who is unemployed, such as education, ethnicity, and geography (which can vary state to state, city to city, or even street to street). If a particular group was overrepresented or underrepresented, the figure can be strongly biased.

Many people are included as employed when they don’t earn a livable income. Just because someone is classified as employed doesn’t mean they can survive off their income. They are the “under-employed” and are not represented in the federal unemployment rate. I have a friend whose employer only gives her work four days every two weeks, so she still has to live with her parents. Although she is technically employed, she cannot make ends meet with her part-time job. Furthermore, some are considered self-employed, but their business doesn’t earn substantial income. Many other jobs, such as farm workers or tourist companies, offer seasonal employment, so someone classified as employed may only work for a couple of months.

The business survey double counts people who have multiple jobs. If you work on a fryline at KFC, do auto body work, and help out with a landscaping company, you will add three jobs to the survey. In other words, your part-time job may end up “counting” for someone who is actually unemployed. This makes it difficult to know how many people really have jobs, especially in times when many must find a second job just to get by.

Overlap can cause confusion. Some people fall into a couple of unemployment situations. For example, students are normally left out of the work force. However, if a high school student starts looking for a job, they become part of the work force and are classified as unemployed until they find one. People are also counted as employed if they just lost their job, but worked during the week of reference the statistician was using.

People are classified as employed as long as they “technically” still have a job. Often, someone is placed on temporary leave due to a variety of issues, but it’s clear they are at risk of losing their job permanently. Others have to leave for medical reasons, but may not be able to return to work. These people may know they won’t go back to work again, but until their employment status is sorted out, they are classified as employed.

What Is the Real Unemployment Rate?

Unemployment is difficult to calculate accurately for a number of reasons. The biggest problem is that the true unemployment rate is subjective. Here are some questions you might ask yourself when deciding what the real unemployment rate is:

Should we count someone as unemployed if they want a job but aren’t looking for one?

Should someone who doesn’t feel like working be classified as unemployed instead of being out of the labor force?

Should disabled citizens who can’t work be classified as unemployed?

Should self-employed people be classified as unemployed if they have no income?

Should high school students be included in the calculation?

In addition to the BLS, other organizations measure unemployment and can produce rates up to two times as much or higher than the rate determined by the government.

Final Word

Considering the factors above, it’s easy to see how unemployment rates can be misleading. If you need to get a sense of how many people have jobs, be skeptical of figures provided by the federal and state governments. In fact, as unemployment benefits expire, the numbers may actually appear to improve in some states.

Unemployment is certainly an important factor to consider when assessing the overall health of the economy, but may be best measured by your own personal experience. If you are one of the many unemployed who aren’t finding work, look less to the overall state of the economy and more toward ways that you might be able to make the best use of your unemployment.

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Kalen Smith has written for a variety of financial and business sites. He is a weekly contributor for Young Entrepreneur and has worked as a guest blogger on behalf of Consumer Media Network. He holds an MBA in finance from Clark University in Worcester, MA.

Ruderichard

Everyone knows what is reprted is a lie. The government has been passning laws for years that send jobs overseas. Execute the traitors in our government…

Dr Jose Martinez

Especially starting in January 2013 when the president ordered that all BLS data be transferred to the new White House West Wing $85 million facility who controls what is published and what is released by BLS (Congressional Records, Dec 2012).

ivanjohn

I am also very concerned about jobs that cannot be exported. Jobs that are being filled by imported cheap foreign labor.. Hiring illegals should be a felony. One in prison and $1000,000 fine for first offender per illegal hired.

Hack Piece Certifier

Disgraceful and deliberately dishonest hack piece.

Dr Jose Martinez

Go back to your liberal fantasy world and the Mainstream media lies that you follow. Just don’t reference any .gov webs that are now starting to reflect controlled data ordered by the current administration.

Dr Jose Martinez

Certifier, you are the hack. With 340,000 to 350,000 Americans that each month who stop looking for work because they have no HOPE of finding work in the Obamaeconomy since 2010, the numbers are closer to the truth.

Mike Holmes

I’m a mechanical engineer with over 10 years of experience under my belt, guess what, I’ve been looking for a job for over six months. What employers are doing is, giving interviews, taking applications and putting them on file for future reference. Just in case they lose someone. I’ve been told by five or six hiring managers that the position isn’t open yet but they will contact me as soon as it does come open. There are a lot more people unemployed out there than the government wants to reveal.

Gayle Schermerhorn

Mike, I am just curious. Do you think this is something new these companies are doing to keep the lie machine going? I think so. I pray you find your job very soon.

ivanjohn

WHAT. the government is putting out these numbers not companies.

ivanjohn

this is not news for anyone who cares at all about finding out the truth. Media that merely regurgitate these phony numbers are mindless drones…. Over 80 million are in dire straights. Every year 3 million unemployed graduate college. Over a million legal migrants come here. Over half of HS seniors skip college and go straight into the job market. That means that 500,000 jobs per month are needed just to stay even. this does not even count the illegals who overstayed their visas and the wet backs. those retiring and dying are just a small portion of job openings.

Uncle Remus

I am offended by the term “wet-backs”. Some have hopped the fence or crawled through tunnels like cockroches, thereby eliminating the possibility of their backs becoming wet.

James

OK – first of all not ever immigrant immediately enters the job market. Second – your rate assumes nobody ever retires – a great deal of retirement is going on as the baby boomers hit 65 – saying it is just a small portion is utter nonsense.. Finally – .no administration has ever produced jobs at the rate you claim is required – the highest was the Clinton years when net new jobs created averaged about 250,000 per month.

Middling

Kalen, 1). Interesting question, because of those who are not actively looking for a job is not counted as unemployed (U-3), but is counted as part of the total. Breaking out those who are too discouraged from college students, the elderly and disabled would provide very useful information. Some folks incorrectly guess that all those not looking for a job are discouraged. I think the reality is that discouraged workers is less than people think.

2). Someone doesn’t feel like working (assuming they are not working) sounds similar to the situation above – not actively seeking employement.

3). IMHO – Disabled should be segregated into similar categories as able bodied – employed, unemployed, not actively working. Maybe a secondary category – Permanently disabled-not able to work.

4) self-employed people be classified as unemployed if they have no income? Again, an interesting question! Since I am not sure how a self-employed person is counted when not working. Depends again, on whether or not they are actively seeking work.

As far as sampling size, did they note the margin or error? Using a sample size of 60K against a population of 330M, can give present valuable information taking into consideration the margin of error.

James

The margin of error with a 95% confidence level, and a finding of 5% unemployment would be about 0.03%. The idea that the sample is not reflective of the population is nonsense.

http://ecofrugality.blogspot.com/ Amy Livingston

The title of this piece is very misleading. It promises to tell us “the REAL unemployment rate” – but all you actually say in the article is that it’s “subjective” and “difficult to calculate.” What’s the point of telling us the figures the government is giving us are bogus if you can’t provide any that are valid?

Douglas Keith

If a person wants a job, they should look for one. If they’re not looking for a job, how much do they really want one? For most of us, we just can’t sit and home and wait and expect there to be a knock on the door, and there’s some CEO saying he has a job offer. That’s not the way it works. People who make no effort to find a job aren’t serious about wanting to work. You have to make an effort.

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